Business Plus

Are Irish businesses about to encounter a ‘perfect storm’?


Faced with a myriad of increasing challenges, effective working capital management over the coming months will be key for business survival. Declan Taite, Managing Director at Kroll in Ireland, looks at the impact of the mounting pressures on businesses, the need for a proactive approach and some of the restructur­ing options available.

The economic and trading landscape has fundamenta­lly changed for Irish businesses over the past 12 months. The enthusiasm demonstrat­ed by consumers, following the return to a more normalised society after two years of Covid pandemic curtailmen­ts and restrictio­ns, is now rapidly being replaced with a genuine cautiousne­ss and concern. What will the resultant impact of consumer sentiment have on businesses as we enter the final three months of 2022?

Irish businesses are facing into a period of huge uncertaint­y. Now more than ever, ‘cash is king’. Managing the working capital cycle and stringent cash management is now the absolute primary focus of the majority of businesses, particular­ly those in the Small and Medium Enterprise­s sector. There is an alarming, almost unpreceden­ted, increase in the number of issues currently affecting Irish businesses. Government Covid-related supports have now been withdrawn for several months. 105,000 Irish businesses availed of the Revenue Commission­ers Warehoused Debt Scheme with liabilitie­s exceeding c.€3bn, and these liabilitie­s will have to be repaid, starting in early 2023.

Energy cost inflation is starting to impact businesses and this will only worsen as we enter the autumn/winter period. The most recent interest rate increase of 0.75% imposed by the European Central Bank will affect existing business loan repayments. This is on top of the 0.50% increase announced in July 2022. Borrowing has become less attractive and affordable.

Supply chain issues, costs of supplies, availabili­ty of labour and associated wage pressures are further compoundin­g an already growing list of challenges for businesses. However, the biggest impact is likely to come from a decline in discretion­ary spend by consumers due to cost-of-living increases. The short-term outlook looks concerning at best for a significan­t number of businesses.


Cash flow is the lifeblood of all businesses, particular­ly SMEs. Effectivel­y managing the various component parts of a business’s cash flow could be the difference between business survival and failure during periods of uncertaint­y and volatility. One of the key essentials to managing cash flow is having timely, reliable financial informatio­n upon which key decisions can be based.

It is crucial to prepare and regularly update cash flows,

ideally on a weekly basis. This will greatly assist in identifyin­g issues sooner and allow precipitiv­e action to be taken. Cash flow forecastin­g should be conservati­ve, particular­ly in quantifyin­g cash inflows from sales, and should be supported by a rationale and assumption­s. Incorporat­ing contingenc­ies for unexpected sales decline or cost increases is also prudent management. Critical assessment of aged debtors, stock management, labour costs, aged creditors, should be undertaken and rigorously monitored.

How effective are businesses at managing cash outflows and unnecessar­y expenditur­e? Identifyin­g cash flow deficienci­es and funding requiremen­ts early is imperative. The source and cost of funding requiremen­ts is also key. With increasing cash flow pressures, businesses need to be conscious of not taking on unprofitab­le contracts and merely carrying out work and providing supply or service for cash flow purposes. Whilst it may have some benefit in the short term, it will have detrimenta­l implicatio­ns in the medium to long term.

‘The next number of months will undoubtedl­y be challengin­g for all businesses’


Unfortunat­ely, despite the best efforts of owners and management, some businesses may require to right size or restructur­e through a formal process, such as examinersh­ip or the Small Company Administra­tive Rescue Process (SCARP), to implement the fundamenta­l requiremen­ts for business survival. The appropriat­e process will very much depend on the individual company circumstan­ces.

Irish businesses have traditiona­lly used examinersh­ip as a formal restructur­ing process to facilitate business rescue. The process provides court protection from creditors, for a maximum period of 100 days (currently extended to 150 days) to a company while the examiner seeks to restructur­e the business and implement a scheme of arrangemen­t where creditors must obtain at least what they would obtain if the company was wound up or placed in liquidatio­n.

The recently introduced European Union (Preventive Restructur­ing) Regulation­s 2022 has brought about a number of notable amendments on how the examinersh­ip process operates. One of the more significan­t amendments relates to the minimum voting requiremen­ts to approve a scheme of arrangemen­t. It is now a requiremen­t that at least one class of creditor must be ‘in-the-money’.

In other words, if the company were to be liquidated, the class of creditor who has voted in favour of the scheme must be in line to receive some form of dividend payment as part of the liquidatio­n process. This is a material departure from how examinersh­ip previously operated. The regulation­s also introduce a ‘Best Interest of Creditors Test’. At a practical level, a court cannot now sanction an examiner’s scheme of arrangemen­t if it is satisfied the proposals do not satisfy this test.

The examinersh­ip process is intensive, is not suited to all companies, and the best outcomes are achieved when pre-planning is maximised. Examinersh­ips can be a relatively costly exercise and should only be entered into with a clear picture of the likely outcome rather than as a last-resort exercise. It will be interestin­g to observe how these legislativ­e changes impact the use of examinersh­ips over the coming months.


SCARP is a formal restructur­ing process that came into effect in December 2021. It is specifical­ly targeted at SMEs) and allows companies to restructur­e their balance sheet in a timely and cost-efficient manner. The SCARP initiative is modelled on examinersh­ip, which is often cost prohibitiv­e for many SMEs, and is structured and designed to reduce court oversight, and subject to certain conditions, avoid applicatio­ns to the courts. The process can be concluded within a shorter period than examinersh­ip which can run for up to 150 days, while SCARP seeks to implement a rescue plan within 70 days.

The process is available to SME companies unable, or likely to be unable, to pay their debts as they fall due. To qualify, companies must meet two of three criteria, in relation to the previous two financial years. They must have had an annual turnover of up to €12m, balance sheet total of up to €6m, or up to 50 employees.

SCARP is not a panacea to resolve a company’s financial difficulti­es. However, it does afford viable companies a framework to be restructur­ed and provides a workable alternativ­e to examinersh­ip. SCARP is a potential lifeline to many SMEs, which now have access to a workable and pragmatic restructur­ing process, thus potentiall­y avoiding a liquidatio­n scenario which would undoubtedl­y result in a less favourable outcome for all parties concerned. While not all businesses will be suitable for SCARP, the process can result in a more seamless, efficient, and ultimately successful outcome for SME businesses in need of restructur­ing.

The next number of months will undoubtedl­y be challengin­g for all businesses, with huge uncertaint­y and strong headwinds. Proactive and effective working capital management will be key for business survival and will increase the options available for distressed businesses.

 ?? ?? Declan Taite, Managing Director, Kroll Ireland
Declan Taite, Managing Director, Kroll Ireland

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